Thinking fast and slow

08 Mar 2012

Is a great book by psychologist and nobel laureate Daniel Kahnemann. If you read one book this year, it should be this. The main theme of the book is the process of thought. Kahnemann very convincingly describes that thinking happens in two distinct ways. There’s a fast and intuitive way to think and a slower more rational thought process. He manages to convince the reader very eloquently that the first intuitive thought process is subject to a lot of biases and misjudgments. He gives a lot of examples of situations when the judgments of the intuitive thought process are incorrect, but are nevertheless accepted by the slow thought process as results of a through analysis.

Kahnemann’s writing style is very fluid and he employs a very vivid description of these biases by giving plenty of examples and anecdotes that further support his psychological findings. I liked the episode on stock traders very much. He tells us that he visited a company that employs stock traders and that they pay their traders based on their annual performance. To find a real proof of the trading skills of the traders, he compared the correlation of the annual performance from year to year and he found it to be 0.01, i.e. negligible. The surprising thing here is that 1. the traders were very confident that they had real skill and were not in fact performing randomly better or worse in one year compared to another because of sheer luck 2. the numbers were readily available to these supposedly mathematically inclined people and they hadn’t used them 3. even after Kahnemann told the traders, they did not change a thing.

This anecdote is an example of how a gut feeling judgment to buy or sell stock is unconsciously promoted to an act of deliberate analysis although. Kahnemann gives numerous examples of biases in everyday life that impede our judgments lead us to intuitive but wrong answers. Thus this book is gold for anyone that wants to make realistic judgments or plans. I hope that it opens the eyes of people that judge other people the most, because intuitive gut decisions can hurt so much in these cases.